Statewide Super’s high-profile CIO Con Michalakis is known for his bold investing style – a style that inevitably leads to taking highly-concentrated and contrarian stakes in coveted assets.

At $8.5 billion, the superannuation fund is small relative to peers. But to Michalakis, being small and nimble allows him to respond quickly to his best ideas and seize assets as they become available.
Adelaide Airport and Flinders Port are two such holdings – good-sized allocations at a combined $500 million.

“They are good assets, so instead of adding a lot of small venture capital,infrastructure or absolute return investments, when we find a really good idea we are not afraid to pump in a decent amount of capital – have a meaningful exposure,” he tells Investment Magazine after clinching the prestigious CIO of the
Year award at the recent Conexus Financial Superannuation Awards.

The Adelaide–based CIO hastens to add that these investments are all made within the fund’s overall asset allocation and diversification plan.

He is certainly not suggesting the fund’s portfolio is dominated by one or two massive assets. But neither does Michalakis want a long tail of small private equity, infrastructure or property assets cluttering up the portfolio. He wants decent sized core positions that he thinks are evergreen and can hold for a long time.

“We don’t frequently move our asset allocation but if an opportunity to grab attractive assets presents itself, we would seize the opportunity,” he says.

It’s the same with private credit strategies. Early on, Michalakis and his team built up a fairly big credit pool by direct lending in the US through buying collateralised debt obligations (CDOs) and bank loans.

“At the time, the quality and the price was right. Returns from these credit portfolios were high single-digit/low double-digit and we quickly built up a position in two or three managers we liked. We allocated decent amounts of money to them and did very well,” he says.

Taking large contrarian stakes in good assets has underpinned significant top quartile returns for the superannuation fund. In the last financial year, Statewide returned 9.31 per cent annualised to members.

Seeking alpha

Nevertheless, while Michalakis and his team might have added alpha, he is convinced such market-beating returns will be a whole lot tougher to produce over the next five years.

As he sees it, the December rout in equity and credit market marked one of the most volatile times since the financial crisis back in 2008. “In December everyone sold off – they thought their world was about to end,” Michalakis says.

Although prices have bounced back the investment chief thinks investors are in purgatory – a difficult world characterised by trade wars, Brexit worries, excess debt and expensive valuations.

“I think we are in a tough environment where we will see squalls and volatility.The easy money was made in the last seven or eight years,” he adds.

Michalakis has seen plenty of volatile times throughout his 25+ year career.

He has witnessed a banking crisis and recession in Australia in the early 1990s followed by the Asian currency crisis in 1997 and the global financial meltdown 10 years later.“I don’t think you can forecast depressions, or even market corrections,you just have to manage what you do and that means being diversified.”

“Importantly, if markets do go through a state of flux, CIOs must have the courage to be contrarian – at least at the margin – which is hard to do.”

Against the trend

Michalakis cites several instances where he and his team have gone against the market.

For example, the fund hasn’t bought into private equity in seven years, other than a very small venture capital asset. Statewide has also been selling down some of its infrastructure investments and hasn’t added any more property recently.

At the same time, the investment team has increased its exposure to active value equities in the past 12 months.“We’ve always use the dip-in-the markets when everyone’s saying ‘the world’s about to fall-in’ where we bought in,”he explains.

“We’ve added more investments in equities and conversely, when markets have gone up, we’ve sold. “So we’ve always tried to think where can we add or subtract new investments that are uncomfortable, and different, so they can make an impact on the portfolio,”he says.

Michalakis has three rules when confronting an unfriendly investment climate. Avoid the noise, try not to take on too much and have the courage of your convictions when you identify a good target
to invest in. “In private markets there is a lot of noise.” he adds.

To be a member of his team, investors have to be independent thinkers. He describes his internal team as being a tightly knit group and stresses the importance of working in an unrestrained environment where people can strenuously debate ideas.

Michalakis’ reputation for having strong views and communicating those means people will always know what he is thinking which he thinks is critical.“Passion, courage and perseverance are crucial as is the ability to do what you think is right no matter what others want to hear.“Sometimes, someone with conviction and passion can be on the wrong side of the fence, but the last thing you want is for the board to be wondering what you’re thinking.”

One of the most important tasks for the CIO is talking to members. As a result Michalakis spends a significant amount of time communicating with them to explain what the fund is doing and why strategies change.

“I love talking to members so I make time for it and so do my team. It reminds me why I am doing this. Members worry about what they’re going to retire with and hearing their concerns sharpens us as an investor,”he says.

That’s why he avoids the noise – which he claims is easier to do being based in South Australia where Statewide is part of the community.

“By divorcing yourself from the media and from what’s happening it’s easier to focus on what you are trying to do for the members. That’s what’s important.”

Elizabeth Fry has been a financial journalist for more than 25 years and has written for a number of publications, including CFO, The Financial Times and The Australian Financial Review.
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